Monday, February 20, 2017

Kazakhstan cuts rate 100 bps, room for new cuts limited

Kazakhstan's central bank lowered its base rate by another 100 basis points to 11.00 percent but said "the potential of further easing of monetary policy is limited" as the new level reflects the long-run balance between price stability and financial stability.
The National Bank of Kazakhstan has now cut its rate by 600 basis point since starting an easing cycle in May 2016 and today's cut follows last month's guidance that it would ease its policy today provided that the decline in inflation continues and confidence in the tenge currency remains.
"The decrease in inflationary expectations, the stability and the predictability of the situation on the domestic FX and money markets, the recovery of business activity, and also the favorable external economic conditions caused the easing of monetary conditions," the central bank said.
Kazakhstan's inflation rate decelerated to 7.9 percent in January from 8.5 percent in December, falling into the central bank's target range of 6-8 percent for the first time since September 2015.
The drop in inflation was in line with the central bank's forecast and higher commodity prices are not expected to have a significant impact on future inflation as they will be offset by moderate price trends in other consumer goods and services.
The latest surveys of inflation expectations also shows a declining trend to the lowest level since mid-2016, with expectations within the target range and at 6.6 percent for January, below actual inflation.
"In the absence of adverse shocks, inflation will persistently remain within the target band throughout the entire year of 2017, and also during the first half of 2018," the central bank said.
Last month the central bank forecast that inflation would end 2017 between 7.3 and 7.7 percent but it did not repeat this forecast today. The central bank's director of research and statistics has forecast 2018 inflation of 5-7 percent, 4-6 percent for 2020 and below 4 percent in 2020. The exchange rate of Kazakhstan's tenge, which fell sharply in August 2015 following the central bank's move to a floating exchange rate regime, has been firming in recent months and was trading at 318.79 to the U.S. dollar today, up 4.6 percent this year.The central bank's move to a floating exchange rate regime last year came in response to capital outflows and the conversion of many tenge bank deposits to foreign currency. Oil accounts for about 60 percent of Kazakhstan's exports and over 10 percent of its Gross Domestic Product. The central bank said devaluation expectations, and the cost of hedging exchange rate risks, had continued to decrease and the share of foreign currency deposits have declined to 53 percent by the end of January. Economic activity in Kazakhstan is also continuing, the bank said, saying Gross Domestic Product is estimated to grow above 2 percent this year. In the first three quarters of 2016 Kazakhstan's GDP grew by an annual rate of 0.4 percent.

The National Bank of Kazakhstan issued the following statement:

"The National Bank of Kazakhstan has decided to reduce the base rate to 11% with a corridor of
+/- 1%. In January 2017 the annual inflation rate has reached the target band of 6-8%. The decrease in
inflationary expectations, the stability and the predictability of the situation on the domestic FX and
money markets, the recovery of the business activity, and also the favorable external economic
conditions caused the easing of the monetary conditions. The new level of the base rate reflects the
long-run balance between the price stability and the financial stability; therefore, the potential of the
further easing of the monetary policy is limited.
The decision on the base rate was made with the account of the following factors.
The annual inflation rate has slowed down in January 2017 to 7.9%, which completely matches
the forecasts of the National Bank. The acceleration of the price growth in the specific commodity
markets and in the paid services will not have a significant impact on the dynamics of the overall level of
inflation and will be offset by the moderate price tendency in the markets of other consumer goods and
services.
According to the survey taken in January on the inflationary expectations of the population, the
observed tendency of improved expectations of respondents regarding the future level of inflation
indicates the mitigation of their pro-inflation behavior. Quantitative assessment of the inflationary
expectations shows that the expectations of the population are formed within the target band and fixed
on the levels (6.6% in January) that are lower than the actual inflation Furthermore, the share of the
respondents, who expect the high level of inflation, has decreased to the lowest value since the middle
of the last year.
So, in case of the absence of the adverse shocks, the inflation will persistently remain within the
target band throughout the entire year of 2017, and also during the first half of 2018.
Devaluation expectations not only of the population, but also of the professional market
participants, have been decreasing, which is reflected in the survey outcome and the hedging cost of
exchange rate risks.
The deposit market data show the ongoing process of de-dollarization of the bank deposits and
the continuing tendency of depositors’ preferences towards national currency. According to the
preliminary data, the share of the foreign currency deposits has decreased to 53% by the end of January
2017.
The signs of the economic recovery are getting more defined. Short-term economic indicator,
which reflects the development of economy’s main sectors, is in the recovery zone and has reached
103.8% in January 2017. In 2017 the real GDP growth is estimated to be above the level of 2%.
In spite of the positive signals of the business activity recovery and the stability of the domestic
money and FX markets, the possibility of the external and internal shocks occurrence, which have the
potential risks for the further economic development and, primarily, for the inflation processes, still
exists. Among those the following risks should be noted: external risks associated with high
dependence on the quotations in the world commodity and financial markets, the speed of the
economic recovery of the countries – trade partners; and also the revision of budget expenditures
upwards. Next decisions on the base rate will depend on the further dynamics of the fundamental
factors of the domestic demand and the stability of the financial sector.
The next decision on the base rate will be announced on April 10, 2017 at 17:00 Astana time."